Posted on October 7, 2011 - by Zoe Carpenter
How bankers are defining the future of the world’s food.
The Midwest is no longer the cradle of American agribusiness—Manhattan’s financial district is. And while Wall Street suits may not look like farmers, they now own vast quantities of virtual crops and livestock. Under their control, the global food system has begun to collapse.
Since the bursting of the dot com bubble in 2000 and the housing crisis in 2008, powerful institutional investors have increasingly directed their cash towards commodity index funds. These financial products track the investment value of bundled futures contracts for commodities like wheat, cattle, oil, and base metals. The Commodity Futures Trading Commission set the stage for a speculative binge in 1999 when they de-regulated futures markets, allowing investors who had nothing to do with agricultural production to purchase as many commodity futures as they liked.
And buy they did. According to Olivier de Schutter, the UN’s Special Rapporteur on the Right to Food, holdings in commodity futures mushroomed from 13 to 317 billion dollars between 2003 and 2008. In those same five years the average price of the commodities that compose the index rose by 183 percent.
Many Americans have been insulated from the rising costs, because they spend only 8 to 12 percent of their weekly paycheck on food—compared to the 2 billion people throughout the world who spend more than 50 percent of their income on food. For them, the price hikes have been devastating. The World Bank reports that rising food prices have driven more than 44 million people below the poverty line. More than a billion people—an unprecedented figure—are now food insecure. But the effects of commodity speculation have rippled quietly throughout the United States, too, where the percentage of food-insecure households rose from 11 to 14.5 percent between 2003 and 2011.
The easy explanation for the world food crisis is exploding demand and dwindling supply. Factors that undoubtedly contribute to the squeeze include the conversion of farmland for biofuel production instead of food; the rise in the consumption of meat and processed foods in developing countries; and crop failure due to the changing weather patterns associated with climate change, all combined with a rapidly expanding global population.
But ballooning prices and volatile markets reflect more than market fundamentals, say researchers, UN officials, and even some Wall Street investors. While supply and demand factors may have kindled the global food crisis, it has been stoked by excessive speculation.
Traditionally, speculation in agricultural markets provided a buffer for farmers and millers in an inherently volatile industry. The idea was that a “futures” market would help to stabilize prices and protect farmers by establishing an agreement on price between producers and buyers before the product was even grown. Usually the futures price was lower than the “spot” or current price of the product. If spot prices had dropped by the time the futures contract matured, farmers benefited, because they received the previously-determined, higher price for their product. Increases in spot prices favored the buyer. Until the early 1990s, most of the players in the futures market were directly involved in agriculture, either as farmers, processors, or food corporations.
That all changed when banks entered the business. In 1991, Goldman Sachs developed a derivative that bundled futures contracts for twenty-four commodities into a single expression of investment value that came to be known as the Goldman Sachs Commodity Index (GSCI). With the change in regulations in 1999, GSCI’s pioneering model took off. Between 2003 and 2005, according to figures from the Lehman Brothers, index fund speculation increased by 1,900 percent. More than a third of Goldman Sach’s net earnings now come from commodities markets, while dozens of other banks offer investors a smorgasbord of commodity index funds.
The problem with the commodity futures market is that it distorts the traditional economic model in which prices are shaped by supply and demand. Instead, momentum drives the investment: commodity futures speculators almost always go “long,” meaning they bet that prices will increase. In order to keep herds of cattle from actually being delivered to their new owners on Wall Street, investors roll maturing futures contracts into another bundle, or sell their contracts and invest in new futures, continually feeding the cycle. Unlike consumers, index speculators increase their demand as prices rise. Then, “demand shock” drives up prices yet again.
Investors claim that because they are dealing only in futures and not with the spot market, they have little impact on real market prices. In fact, according to the FAO 98 percent of all futures contracts never result in a real transaction of goods.
Even so, the evidence suggests that by betting on the future, Wall Street is defining the present. A 2010 study by Manuel Hernandez and Maximo Torero for the International Food Policy Research Institute considered price data for corn, wheat, and soybeans, and the dynamic relationship between spot and futures markets. They found that, in general, real market prices do rise to meet commodity futures prices.
The human tragedies that followed the 2008 financial crisis should have shattered the myth that finance occurs on a separate plane from everyday lives. Turning the world’s food into money is filling a few pockets, and emptying millions of stomachs. The speculative bubble has made food inordinately expensive, and people are hungry because they simply can’t afford it.
Representative Barney Frank and the Chairman of the Senate Banking Committee Chris Dodd have proposed financial reform legislation (known as the Dodd-Frank Act) with a section that would require the CTFC to limit the positions held in futures contracts. The CFTC failed to reach an agreement on the limits by last week’s deadline, and the rules have been delayed again. According to Edward Miller in Global Research, leaks from the CTCF indicate that the limits they are weighing focus on oil, not food, and are riddled with loopholes. The Anti-Speculation Act, proposed by Senator Bill Nelson and Representative Peter Welch in late September, takes a stronger position, but given the massive support that both parties receive from the financial industry, Congress is unlikely to move forward on the legislation, particularly while the CFTC continues to stall. And as Frederick Kaufman writes in Foreign Policy, even if regulations were established in the U.S., food derivative markets have expanded globally to the extent that they are “beyond the reach of sovereign power.”
Even if financial regulation couldn’t fully reign in the runaway speculative train, it’s important to acknowledge the defining role commodities futures play in our food system, and for regulatory bodies to distinguish between financial and commodity derivatives. A handful of reporters like Kaufman, Horand Knaup, Michaela Schiessl and Anne Seith for Der Spiegel, and Tom Philpott for Mother Jones, have recently illuminated the costs of the newest investment bubble. But without greater attention, I wonder if we’ll be blindsided, just as we were in 2008, when it bursts.
Meanwhile a billion people are hungry worldwide. Now in its third week, the Occupy Wall Street demonstration has brought thousands of marchers representing labor unions and other organizations, along with ordinary citizens, to Manhattan’s financial district to join the populist protest. Solidarity demonstrations are underway across the United States. Regardless of what you think about the movement, it’s clear that corporate influence in politics effects our food system in many ways. Perhaps the movement is, at its heart, a struggle for our daily bread.